We continue to live in a time of extreme uncertainty. Against the backdrop of the ongoing war in Ukraine and the cost of living crisis it’s human nature to wonder what impact these events will have on the performance of our investments.
I don’t know what is going to happen from here, however, given the evidence of history the odds are in our favour that the investment markets over the long term will deliver the returns that are needed to help us get to where we want to go. By long term, I mean decades rather than years. This gives us the greatest chance to capture the power of compounding and bank those little gains which add up over time.
By zooming out over a longer timescale the current downward movements we are currently seeing will appear to be a small blip within a longer-term upward trend.
In order to stay calm and not panic in these situations it is imperative that a plan is in place. By a plan I don’t mean a two inch thick book, but something which can be loosely set out onto just one page which ideally aligns your capital (time, money, energy and attention) to what is important to you.
Everyone’s situation is different, and when it comes to creating an investment portfolio which is aligned to the plan, the degree of risk to be taken will vary. One of the key components of not selling out when things get scary is having undertaken a “fire drill”, in other words, having an awareness of how much your portfolio could fall by in the event of a market crash scenario. This is hopefully to avoid panic when this does happen, which thankfully is not very often.
When it comes to risk, in return for taking more of this the ups and downs will be bigger and the returns are likely to be higher over the long term. Taking a lower level of risk may result in a more comfortable investment journey but will result in giving up some of the upside when markets are going up. It’s about getting that balance right and aligning all the relevant considerations to the plan.
Sometimes when markets are down we can find ourselves tempted to make a change. However, trying to time short term moves has more in common with gambling than long term investing. A key part of investing is to accept that shocks will happen. At the current time there is inflation, fear of a recession, a war in Ukraine and bigger daily movements in the markets. Nobody knows when this is going to end and what will cause the next shock or when it will occur. It’s going to come as a surprise as it always does because if it didn’t the market would have already priced it in.
As a long-term investor, the good news is that you can capture the returns of the market without trying to speculate because no one is consistently good at doing this. Investing equals uncertainty. Uncertainty never goes away. If it did, there wouldn’t be a positive premium to gain from. There have been a lot of negative surprises over the last 25 years or so, but also a lot of positive ones as well and the markets have continued on an upward trend.
It is not easy to stay disciplined and stick with an investment strategy when we are experiencing this current turbulence. I think it is also important to focus on the things that are in our control (unlike the markets), like cutting out spending on pointless stuff and instead focus spending on the things that matter.
It is tough being an investor right now but by having your portfolio aligned to a plan should help you maintain a long term perspective and the ability to stick with it and reap the resulting benefits.